When your third (or was it fourth or fifth?) cousin asked for a personal loan for their business, did you really think that was an unusual request? Hardly. Estimates are that one in ten Americans has a loan outstanding to a relative or friend.
This is such a common subject that there are sites devoted to telling you as a business owner how to go about tapping those friends and relatives when you need some bucks (“Be considerate and respectfully ask for modest amounts”).
If you really wanted to invest in a business and stock was available (and you were confident of success), you could invest anonymously in a company by buying shares and holding onto them (even if the company reported losses and the stock declined).
But a much more common and personal approach is a personal loan. It may be a good and available source of money for them but is it a good idea for you?
To make it work, you will have to put on a mask some people regard as evil. You will have to think (shudder) like a banker.
You first have to do what bankers do: take a cold hard look to determine if this relative is a real candidate for a personal loan. The very best candidate for a banker, of course, is someone who absolutely, positively, does not need your money.
That’s nobody you know. And it’s very unlikely.
Then, there are loan applicants who seem to have good chances of paying off what they are getting.
They can (a) put up collateral that is more than the loan or; (b), they have a great track record of promptly repaying debts (and even meeting the loan terms).
Of course, if you know the relative is a real deadbeat, you can simply say no. If you explain why (deadbeat reputation), it’s pretty much guaranteed to chill any further relations.
If you are considering financing, however, remember that bankers always get it in writing. So should you. All terms explained. Interest rate. Deadlines, etc.
But even before signing, look at your own situation. Can you afford the personal loan? But what if you lose everything? How bad would that be? Here’s where you might establish a good criteria for your private loan bank: if you can’t afford to lose the money, don’t do it.
For the person seeking a personal loan, one of the best suggestions I have read about the situation is that “if you love your family, don’t get them involved in your business.”
If it’s you doing the investing, remember that this will have a major impact on how you view relatives/friends. It changes your relationship. You will become a passive but hardly disinterested partner in the business and its financial dealings. That will come up the next time you have dinner with your brother at Ruth’s Chris (his suggestion) and he orders the $90 filet. That’s when you’ll remember that you could have simply said no.